04.07.16
Urbanisation: driving rail investment
Source: RTM Jun/Jul 16
Patrick Groarke, head of industrial sector at Livingstone, looks at how urbanisation is fundamentally driving demand for rail in the capital, and why this is providing a supportive environment for both strategic acquirers and financial investors.
UK rail has seen an active start to 2016 in terms of mergers and acquisitions activity, with two private equity houses making new investments in the sector.
The fact that the sector has continued to provoke acquirer and investor interest against the background of ongoing debate over high-profile projects, such as HS2 and the findings of the Hendy Review, is testimony to its strong fundamentals. Both financial investors and strategic acquirers are attracted by structural growth driven by urbanisation, and, of course, the relative strength of the UK economy.
Whilst many in the developed world would regard urbanisation of their societies as a 19th and 20th century phenomenon that is now largely complete, in reality this transition is multi-dimensional and is far from exhausted. The classic migration from rural to urban employment and residence in developed countries continues at a moderate pace even today. In the UK, from 2004 to 2014, the urban share of population grew 3%, which may not sound dramatic but represents the relocation of nearly two million people into towns and cities.
In parallel the proportion of the urbanites living in cities rather than towns grew significantly faster. From 2004 to 2014, the population of the five largest cities in the UK grew 14%, whilst the urban population grew 11%, and the population as a whole grew only 8%, according to the ONS.
This concentration of the urban population in large cities is set to continue, both in the UK and globally. Over the next 20 years London is projected, by the ONS, to grow almost 70% faster than the overall population of the UK.
City living reliably drives demand for rail
For the rail industry, this migration towards urban – and particularly city – living is a dependable driver of growth in passenger volumes, as the higher population density of urban environments favours public transport, particularly rail. City dwellers are dramatically more likely to use rail transport regularly; half of Londoners commute to work by public transport, a proportion more than three times higher than the rest of the UK.
Outside the capital, recent investments in rail infrastructure such as the Tyne & Wear Metro and the Nottingham Express Transit have driven significant local increases in commuter rail traffic.
Structural growth drivers attractive to financial investors
These structural drivers of growth in rail traffic – and hence both revenue and capital spending on rail networks – provide a supportive environment for both strategic acquirers and financial investors, whose decisions are primarily predicated on medium- and long-term views of the attractiveness of a market opportunity, rather than the short-term considerations of the planning and budget cycles.
Recently, we have seen two overseas strategic buyers – Ricardo and SNC Lavalin – choose to acquire high-quality international businesses, based in the UK, serving the rail market; decisions driven by both the positive domestic market outlook and growth opportunities internationally.
In the case of Ricardo, a significant component of the motive to buy Lloyd’s Register Rail was to secure market-leading expertise and capability that could be applied across a multi-national business. In acquiring Interfleet, SNC Lavalin gained a business that had already developed a significant international platform, which it saw the potential to both grow and integrate with a broader range of services.
Private equity houses have also shown renewed interest in the UK rail industry, with three meaningful investments in the rail services sector completed over the last year. The most recent of these, LDC’s investment in TXM Plant, an operator of road rail vehicles, is their second deal in the sector in 12 months, following their 2015 investment in Aspin Group, a specialist in piled foundations.
Positive long-run structural trends in the distribution of population and modes of transport make the UK rail industry attractive to strategic acquirers, both domestic and overseas, and private equity investors. Despite the inevitable political uncertainties of the sector, deals are getting done and high-quality businesses are achieving attractive valuations – recognition of market-leading expertise in the UK rail industry.
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